Private Equity's NAV Illusion

01 The 24-hour gain

There is a strange corner of private markets where a fund can buy an investment on Friday, publish a higher value on Saturday, and show a gain before anything has actually been sold. On paper, the performance is real. Economically, it is more complicated.

The Wall Street Journal recently highlighted the mechanics through several registered private-market funds that buy stakes in private-equity and venture-capital funds on the secondary market. The cleanest example was Hamilton Lane Private Assets Fund. On 29 September 2023, the fund bought a group of private fund stakes for roughly $52 million. One day later, those same investments were carried at a value 39% higher.

StepStone's Private Venture and Growth Fund showed an even more extreme example. It bought an interest in CNK Fund IV for about $538,000 and marked it at $8.7 million on the same date. That is a 16x value on paper. The first reaction is obvious: how can something be worth 16 times more the day you bought it?

The answer is not as simple as "the valuation is fake." The secondary purchase price and the reported NAV are answering different questions. One is the price paid by a specific seller who wanted liquidity. The other is an estimate of the value of the underlying portfolio, often based on the general partner's own marks. The problem starts when investors treat both numbers as if they were equally observable market prices.

This is the core tension. Secondaries are useful. They provide liquidity to LPs that are stuck in long-dated private funds. They help pensions, endowments, insurers and family offices rebalance portfolios without waiting for exits. They also give buyers access to seasoned assets at a discount. But when the buyer is a fund that reports monthly performance, raises money from private-wealth channels and may charge fees on unrealised gains, the accounting becomes more than a technical detail.

02 Why secondaries became so important

Secondaries exist because private equity has a liquidity problem. That is not a criticism. It is the basic design of the asset class. Investors commit capital for ten years or more. Managers buy companies, hold them, improve them, and eventually sell them. In a normal cycle, distributions come back regularly enough to make the whole machine work.

The machine has been slower since 2022. Higher rates made leveraged buyouts harder. Public markets became less reliable as an exit route. Strategic buyers became more selective. Many private-equity funds are still holding assets bought at high multiples in 2021 and 2022, and selling those assets today may crystallise returns that look worse than the marks.

Bain's 2026 work on private equity gives the scale of the issue. Buyout funds were sitting on roughly 32,000 unrealised companies representing about $3.8 trillion of value. Average holding periods at exit have moved close to seven years, and distributions as a percentage of NAV remained around 14%, a level Bain compares with the global financial crisis period.

That is why the secondary market has moved from niche liquidity tool to central infrastructure. LPs want cash. GPs want more time. Buyers want seasoned portfolios. Everyone has a reason to use the market.

The growth is not only about distressed sellers. The market is becoming institutionalised. Jefferies estimated that dedicated secondary capital reached $327 billion in 2025. Evergreen vehicles also became a larger source of demand, with Jefferies estimating $113 billion of inflows into such vehicles and around 41% allocated to secondaries. This matters because evergreen and registered funds do not behave exactly like traditional closed-end secondary funds. They report performance more frequently. They need to manage subscriptions and repurchases. They also need a narrative that private markets can be packaged for a broader investor base.

03 The markup mechanic

The mechanic is simple. An LP owns a stake in a private-equity fund. The official NAV of that stake is $100. The LP wants liquidity and sells it for $85. A secondary buyer acquires it. The buyer then reports the stake at $100 because the GP-reported NAV is treated as the best estimate of fair value.

No portfolio company was sold. No IPO happened. No dividend was received. The buyer simply paid below the reference NAV and then carried the investment closer to that reference NAV. The gain is accounting income, not cash income.

At modest discounts, this is already meaningful. At extreme discounts, the numbers become spectacular. The WSJ examples are eye-catching because some of the marks were not 10% or 20% above cost. They were several times cost.

The table is not saying that every secondary purchase is suspicious. Sometimes a seller really does need cash quickly and accepts a discount that has little to do with the underlying companies. A pension plan may need to reduce its allocation. An endowment may need liquidity. A family office may want to stop funding capital calls. A bank may be cleaning up balance sheet exposure. In those cases, the discount is partly a liquidity price.

Still, the size of some of these gaps forces a basic question: if the only observable trade happens at 85 cents on the dollar, why is 100 cents automatically the better estimate?

04 What fair value is trying to measure

The accounting defence is not absurd. U.S. fair-value rules are not designed to say that the last distressed trade is always the correct value. Fair value is meant to estimate the price that would be received in an orderly transaction between market participants at the measurement date. That word "orderly" matters.

A forced sale by one LP that needs liquidity may not be orderly in the economic sense. The buyer may also be taking on unfunded commitments, transfer restrictions, information gaps and concentration risk. A secondary price therefore includes a required return for illiquidity and complexity. It is not a pure mark-to-market print like a listed stock trade.

This is why many investors use NAV as a practical expedient when valuing private fund interests. In plain English, they can start from the NAV reported by the underlying fund manager, unless there are reasons to believe that the NAV is not representative. That is a practical solution for a market where daily observable prices do not exist.

The industry argument is therefore reasonable up to a point. A transaction at 85% of NAV does not automatically mean the GP's NAV is wrong by 15%. The seller may have accepted a poor price to get liquidity. The buyer may have better information or a lower cost of capital. The GP may be valuing individual portfolio companies using fresh data that the seller's negotiated price does not fully reflect.

But there is also a weak version of the industry argument, which says the transaction price tells us nothing. That is much harder to accept. If a fund interest just changed hands at a large discount, a serious valuation process should at least ask why. The answer may still be that NAV is the best estimate. But the question cannot be skipped simply because NAV is convenient.

05 Where incentives enter the story

Valuation choices matter because they feed directly into performance, assets under management and fees. This is the part that makes the topic bigger than accounting theory.

If a fund buys an LP interest at 85 and carries it at 100, the fund reports a 17.6% gain on cost. That gain increases NAV. A higher NAV improves reported returns. Better returns help fundraising. Higher AUM increases management fees. If the incentive fee is calculated on total return and paid periodically, unrealised gains can also become fee revenue before the asset is sold.

Hamilton Lane's own 2025 proxy statement is useful here. The proposed fee change for its Private Assets Fund reduced the base management fee from 1.50% to 1.40%, but also changed the incentive fee from 12.50% calculated on a deal-by-deal basis to 10.00% of quarterly net profits over a loss recovery account. Under the old method, the proxy says the deal-by-deal incentive fee was ultimately tied to each investment's performance from acquisition to full realisation. Under the new method, incentive fees are paid quarterly if the fund has net profits above the relevant loss recovery balance.

This does not mean the fee structure is illegal or hidden. It was disclosed. Shareholders had to vote. There are also legitimate arguments that a fund-level high-water mark is easier to understand than deal-by-deal accounting. But the incentive shift is real. If NAV-based gains can feed quarterly net profits, then buying discounted secondaries and marking them closer to NAV becomes economically valuable to the manager before an exit happens.

The broader risk is not that every manager will abuse the rule. The risk is that the rule creates a temptation. Hamilton Lane's Private Secondary Fund risk disclosures are unusually direct on this point, stating that the incentive fee structure could create an incentive to buy assets with steep discounts compared with the sponsor's valuation of those assets. That is the sentence investors should read twice.

06 Why the retail wrapper changes the stakes

Traditional secondary funds are mostly institutional products. LPs commit capital, wait for drawdowns, understand the J-curve and evaluate returns over years. A day-one accounting gain inside that structure still matters, but the investor base is more used to private-market complexity.

The wealth-channel version is different. These funds are built to give qualified individual investors, family offices and advisers access to private markets through more accessible structures. They often offer periodic subscriptions, periodic NAVs and limited liquidity. Hamilton Lane describes its Private Assets Fund as solving some of the challenges of a traditional private-equity fund by offering quarterly limited liquidity.

That packaging changes expectations. Investors see monthly NAVs, smoother charts and private-market access in a format that feels closer to a fund product than a ten-year commitment. The danger is that the wrapper can make private assets look simpler than they are.

There is a second-order effect too. If a fund reports strong returns because it bought secondaries below NAV and marked them up, it may attract more subscriptions. Those subscriptions give the manager more capital to buy more secondaries. As long as discounts exist and marks hold, the strategy can look very powerful. But if exits later happen below carrying values, or if redemption demand rises, the smoothness can disappear.

This is why private-market democratisation needs more precision. Access is good. Broader participation can be good. But access without a clear understanding of valuation, fees and liquidity is not democratisation. It is product distribution.

07 What investors should actually ask

The useful approach is not to reject secondaries. That would be lazy. Some of the best risk-adjusted opportunities in private markets can come from buying seasoned funds at discounts, especially when the seller's problem is liquidity rather than asset quality.

The better approach is to separate three things that are often blended together: the quality of the underlying assets, the price paid for the LP interest, and the valuation policy used after purchase. A strong secondary buyer should be able to explain all three clearly.

The strongest defence of the industry is that private equity marks are not obviously broken. Bain cites MSCI analysis showing that more than 75% of buyout assets still exit above their next-to-last quarterly mark, broadly in line with historical patterns. That matters. It means the simplistic view that every private-equity NAV is inflated is not supported by the evidence.

But that does not resolve the specific secondaries issue. The question is narrower: when a fund buys a private fund stake at a clear discount, how much of that discount should be recognised immediately as performance? Reasonable people can disagree on the answer. What is not reasonable is pretending the answer has no consequence.

08 The real takeaway

The secondary market is becoming essential to private equity. That is the first takeaway. An industry with longer holding periods, slower distributions and more unrealised value needs a functioning resale market. Without secondaries, many LPs would have fewer ways to manage liquidity and many GPs would have fewer ways to give time to assets that still need it.

The second takeaway is that accounting can create optical performance. When a fund buys below NAV and immediately marks closer to NAV, the reported return may be economically explainable, but it is not the same as value creation from an exit, EBITDA growth or deleveraging. It is partly the monetisation of a discount.

The third takeaway is the most important for investors. In private markets, structure always matters. The same underlying asset can look different depending on the vehicle, the fee terms, the liquidity promise and the valuation policy. A secondary purchase inside a closed-end institutional fund is one thing. The same purchase inside a retail-facing evergreen fund with frequent NAVs and possible fees on unrealised gains deserves more scrutiny.

My view is not that secondary funds are bad. The better version of the strategy is genuinely useful: buy from motivated sellers, underwrite the underlying portfolio properly, take liquidity risk, and get paid for it over time. That is a real investment strategy. The weaker version is more fragile: buy at a discount, mark up quickly, show a smooth return profile, collect fees, and hope that future exits confirm the paper marks.

The honest answer is boring, but it is probably the right one. Secondaries are neither a scandal nor a magic trick. They are a market. Like every market, the interesting part is not the headline price. It is who needs the trade, who sets the mark, who gets paid, and what happens when the paper value finally meets a real exit.